Role Of Management Accounting In An Organization: Definition, Classification Of Costs, And Responsibility Accounting

Role of management accounting in an organization

This study deals with the concept on management accounting and explains the nature, source as well as purpose of management information in a business context (Suomala, Yrjänäinen and Lukka 2014). Addition to that, Management accounting refers to a function that is used for tracking the interior cost for any trade procedure and helps an association, firm that gets related with the production, operations as well as investment in market. The current segment explains the role of management accounting in a particular business association. Differences between management accounting and financial accounting are portrayed by taking various elements of differentiation and comparison. In the next segment, cost is defined and its classified based on function, type and behavior. FIFO and LIFO methods have been explained with proper justification while managing stock by any business organization (Simons 2013). The last segment explains responsibility centres and its types such as profit centre, revenue centre, investment centre and cost centre.

The role of management accountant is to gather evidence as well as account monetary data from a range of units in an organization (Renz 2016). They are responsible for observing and analyzing the budget as well as suggesting funding and allocation at the same time. This takes into consideration material, labor, advertising, manufacturing as well as sales and internal operation costs of the company. In a large corporation, each separation has a top accountant known as manager where management accounting conducts these divisions that comes under the management of the organizer. The main reason of management accounting in an association is to hold up gung ho decision-making through collecting, processing as well as communicating information where the organization will plan, manage and assess the industry process and the given business plan. Management accountant has the aptitude to expand as well as use good organization secretarial that is actually essential for most of the persons such as business professionals, top-level executives, information technologists as well as operational and marketing managers (Tucker and D. Lowe 2014).

Cost had been divided by its functions namely production cost and non-production cost.

Production cost is those costs that represents the total manufacturing or product cost. Addition to that, production costs refers to the cost that is used by business at the time of manufacturing of goods as well as services. These costs take into consideration variety of expenses but not limited to labor, consumable manufacturing supplies as well as raw materials and overhead. Therefore, any taxes levied by the government or royalties are actually owed by natural resources that is extracted by companies and terms as production costs (Kaplan and Atkinson 2015).

Management Accounting versus Financial Accounting

Non-production costs are those cost that takes into consideration prepared operating cost of the commerce and further alienated into types such as management cost, distribution cost and advertising cost. Non-productive costs of an organization are those costs that are not classified as manufacturing overhead (Fullerton, Kennedy and Widener 2014). This takes into consideration administration overheads, distribution overhead, selling overhead as well as research and development costs.

Direct cost is a cost that can be accredited to the manufacture of exact goods as well as services. Some overhead costs can be straight qualified to a scheme and termed as direct costs (Fullerton, Kennedy and Widener 2014).

Indirect costs are not openly answerable to a cost thing like a specific scheme, purpose and facility. This can be either fixed or variable in nature. This cost takes into consideration costs like reduction or managerial expenses that are hard to allocate for a exact product and termed as indirect costs (Fullerton, Kennedy and Widener 2013).

Cost can be divided by its behavior namely fixed cost, variable cost and semi-variable costs.

Fixed cost is those cost that relates to time or period. Addition to that, fixed cost remains unchanged irrespective to production volume such as insurance and factory rent. Fixed cost depends upon the cost per unit that actually fluctuates based on production (Dekker 2016). There is inverse relationship between cost per unit and production if one increases then other decreases automatically.

Variable cost is those cost that directly associates with unit. In other words, this unit increases or decreases in accordance with the volume of production (Cooper, Ezzamel and Qu 2017). Variable cost includes direct material and direct labor where changeable cost per unit remains steady irrespective of manufacture units.

This cost is the combination of fixed cost and variable cost where detailed segment of the costs remainder fixed and the stability portion are variable.

Both the methods known as LIFO and FIFO have its advantages and disadvantages. Among both the methods, LIFO methods do not inflate profits when the process of products is rising but there are complications in the particular method. It depends upon the irrational assumptions where LIFO method is not used in recent times because it handles the latest stock in hand first. This is actually unfair as earliest stock stands in the queue. (Christ and Burritt 2013).  On the contrary, FIFO method is simple to understand and operate at the same time. This method portrays correct picture when there is fall in the price. Both the methods are still used in business organization based on the situation and nature of the stock. From the above differences, it can be easily understood that both the methods are unique in nature as well as different from one other in every aspects (Fullerton, Kennedy and Widener 2014).

Classification of costs

Responsibility accounting is one of the coverage scheme that includes income, price as well as earnings information at the level of person managers who are directly accountable. The main intention is to render relevant information to those public who are able to judge the level of performance (Chenhall and Moers 2015). Therefore, responsibility accounting is one of the common used reporting systems that are applied in an organization where there is distribution of responsibility throughout the corporate hierarchy.

Responsibility center is one of the part or subunit of a company where managers have the authority as well as responsibility. Detailed information is provided for the company through presenting organizational chart in a logical way where sources are used for determining the responsibility centers (Suomala, Yrjänäinen and Lukka 2014). There are four types of accountability centers namely cost centre, profit centre, investment centre and revenue centre.

Cost centre is one of the segments of an organization where managers are mostly accountable for the cost that is incurred in that particular section but not for revenues. In that case, accountability in a cost centre is restricted to cost (Fullerton, Kennedy and Widener 2014). It is the responsibility of the cost centre managers for controlling the entire price in that section of business but not over revenues. Cost centre is the most important forms of responsibility centres.

Revenue centre is one of the responsibility centres where the prime responsibility was to generate sales revenues. It is the responsibility of the revenue centre managers for controlling the expenses incurred by the marketing department. Revenue centre performance can be understood by making the comparisons between actual revenue and budgeted revenues.

Profit centre is one of the responsibility centres where manager are responsible for both revenues as well as costs. It is the responsibility of the manager for taking decisions that affect both costs as well as revenues for the given subdivision or division. The main objective of income centres is to make profit within an organization where the profit centre managers takes into consideration both production as well as marketing of a product (Fullerton, Kennedy and Widener 2014).

Investment centres is one of the responsibility centres where the managers are responsible for both profits as well as investments at the same time. It is responsibility of speculation centre supervisor that has managed over revenues as well as operating cost and amount invested in the assets within an organization. In other words, they need to formulate recognition policy that has express influence on money owing compilation as well as record policy that determines the speculation in stock. The supervisor is responsible for managing a cost centre or profit centre (Suomala, Yrjänäinen and Lukka 2014).

By function

Conclusion 

From the above analysis, it is concluded that management accounting plays an important role in any business organization in terms of performance. From the above analysis, it is understood that management accountants are responsible for rendering information and involved in proper decision-making process. Financial accounting and management accounting are explained above based on their objectives, nature and scope. Cost is classified into various types that are explained above with proper justification. LIFO and FIFO method is explained in the study that will bring proper insights of information what stocks needs to used first and then the later. Therefore, responsibility centres is explained and further divided into cost centres, profit centres as well as investment centres and revenue centre.

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